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Conditional sampling for barrier option pricing under the Heston model

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  • Nico Achtsis
  • Ronald Cools
  • Dirk Nuyens

Abstract

We propose a quasi-Monte Carlo algorithm for pricing knock-out and knock-in barrier options under the Heston (1993) stochastic volatility model. This is done by modifying the LT method from Imai and Tan (2006) for the Heston model such that the first uniform variable does not influence the stochastic volatility path and then conditionally modifying its marginals to fulfill the barrier condition(s). We show this method is unbiased and never does worse than the unconditional algorithm. Additionally the conditioning is combined with a root finding method to also force positive payouts. The effectiveness of this method is shown by extensive numerical results.

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  • Nico Achtsis & Ronald Cools & Dirk Nuyens, 2012. "Conditional sampling for barrier option pricing under the Heston model," Papers 1207.6566, arXiv.org, revised Dec 2012.
  • Handle: RePEc:arx:papers:1207.6566
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    File URL: http://arxiv.org/pdf/1207.6566
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